Global grocery retailers struggle with expansion into emerging markets

05 May 2016 Consultancy.uk

The expansion strategies of international grocery retailers into emerging markets is not as effective as hoped for. In many countries, small business local players are better able to service the local market, often providing their customers with high quality, locally grown goods.

In many western economies, global grocery retailers were able to quickly conquer local market players, blanketing their home countries with supermarkets and hypermarkets. Around 20 years ago European retailers, having all but monopolised local markets, sought to expand their format of grocery retail into emerging markets; large growth prospects were envisaged along with the prize of hundreds of millions of new customers.

The expansion was expected to mean the demise of the traditional trade—the family-owned grocery chains, small independent stores, and informal merchants; that at the time accounted for the vast majority of grocery sales in emerging markets. The expectation, however, did not bear out. Global players are often times failing to gain a profitable foothold in emerging markets. A new study from McKinsey & Company, titled ‘Modern grocery and the emerging-market consumer: A complicated courtship’, explores the market dynamics as well as current challenges of modern grocery retail in emerging markets.

The paradigm case, Germany, has a penetration of around 85% for modern grocers. Italy and Spain, which were conquered in the 1990s, have penetration around 70%. Yet, emerging market players show considerable variation. China for instance, has penetration of around 65%, while India has penetration of less than ten percent. Vietnam and Indonesia too have sub 20% penetration rates, while Brazil and Mexico come in at between 50% and 60% penetration.

Entry difference
One of the main advantages that supermarkets enjoy in western economies is scale. By offering tens of thousands of products in an immense building just outside or on the edge of a town or city, a hypermarket can operate at a level of productivity that other grocery formats struggle to match. Hypermarket operators pass on these efficiency gains to consumers in the form of lower prices, which serves to reinforce hypermarkets’ advantage.

In emerging economies, however, the supermarket and hypermarket format has failed to gain traction. The reasons vary considerably between the different markets. Different climates, coupled with more complex cultural and family structures, mean that local businesses can be more personable, more convenient and provide higher quality local goods. The strong tradition of home cooking, coupled with being accustomed to close to home open air market places, mean that the proposition of travelling some distance to super market provides no added value.

Global retailers also face other challenges, such as the efficiency of family businesses that operate the business as a family, corporate taxation not paid by incumbents, as well as foreign direct investment rules that inhibit expansion. Furthermore, incumbents tend to have strong relationships with local suppliers that are mutually beneficial – whereas global grocers tend to rely on a stronger bargaining position for their profit margins.

While market entry remains difficult in a number of economies, some markets are seeing increased use of modern grocery formats. Turkey for instance, has seen a strong rise in the market share of discounters; up from 2.2% in 2006 to $10.8% in 2013. Supermarkets grew from 15% in 2006 to 21.4% in 2013. The market share of supermarkets will remain relatively static, although grow in absolute terms, in the years to 2018 to around 22.5%, while discounters will continue to quickly expand, reaching a market share of 18.1%.

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